Should you buy British American Tobacco plc (LON: BATS) today?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at British American Tobacco (LSE: BATS) (NYSE: BTI.US) to determine whether you should consider buying the shares at 3,255p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
|British American Tobacco||3,255p||28%||15.7||2.6||4%||27%||1.5|
The consensus analyst estimate for next year's earnings per share is 207p (6% growth) and dividend per share is 135p (6% growth).
Trading on a projected P/E of 15.7, British American appears to be more expensive than its only London-listed competitor, Imperial Tobacco, which is trading on a forward P/E of 11.3. British American's relatively high P/E and modest growth rate give a PEG ratio of around 2.6, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.
British American currently supports a 4% yield, which is below Imperial's dividend yield of 4.4%. However, British American has a three-year compounded dividend growth rate of 27%, implying the payout could overtake that of Imperial, or at least maintain its current strength.
Unfortunately, the dividend is only covered about one-and-a-half times and does not leave much space for further growth.
Steady historic growth but is British American expensive?
As I say, British American looks expensive compared to its only London-listed competitor. However, I believe the company does deserve this premium. You see, British American accounts for about 22% of the global tobacco market, compared to Imperial's relatively small 9%. Furthermore, British American is still seeing strong sales and revenue growth.
I believe the main contributor to British American's current growth is the company's three main 'global drive' brands. Indeed, I can see that in the first half of 2012, these growth brands pushed total sales higher by an aggregate of 3% -- and one of the brands even saw total sales grow by 14%!
Nonetheless, like the rest of the tobacco industry, British American is facing increasing pressures from changing global opinions towards cigarettes. In addition, the group is suffering from the economic climate in Europe, where falling consumer incomes are driving the growth of the illegal tobacco industry.
Despite these pressures, British American continues to focus on growth and diversification. In addition to the 'global drive' brands, the company is seeking acquisitions and has recently acquired businesses in Turkey and Indonesia. Furthermore, British American recently brought CN Creative, a UK based start-up that is focused on the development of electronic cigarettes.
So with all that in mind, I believe now looks to be a good time to buy British American Tobacco at 3,255p.
More FTSE opportunities
As well as British American Tobacco, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.
The report, which explains the full investing logic behind Mr Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Rupert owns shares in Imperial Tobacco.